Chapter 7

Question 1

What are the different types of account ownership?

Answer 1

Individual, Joint, Corporate, Trust, Partnership

Question 2

What kind of information does the registered representative need to obtain regarding the client apart from basic information and characteristics? What needs to be determined? Who must sign account card?

Answer 2

-Is client D&O or 10% owner of a publicly traded co.?
-Which rep introduced client and will be handling client?
-Principal must sign new account card

Question 3

What is the Pre-dispute arbitration clause?

Answer 3

-disclosure: arb is final & binding, not based on legal reasoning, minority of arb panel affiliated w/ securities industry
-statement: discovery process limited, waiving right to jury trial, copy of clause & signature

Question 4

How should customer account information be treated?

Answer 4

Copy of info collected on customer account
-sent to customer < 30 d
-updated 36 m
-changes confirmed < 30 d or next statement

Question 5

What are the different ways securities can be held? What system is offered by DTC?

Answer 5

Holding of securities
-Transfer & ship (certificate sent to customer address of record)
-Transfer & hold (held in customer’s name within BD, Direct Registration System offered by DTC => investors can hold securities on the issuer’s books or TA’s books)
-Street name (BD is nominal owner, customer is BO)

Question 6

DTC eligible securities?

Answer 6

Equity & debt, US gov, Muni, MM, mortgage backed bonds

Question 7

What are the different kinds of joint accounts?

Answer 7

-JTWROS (max 2 individuals): all assets transferred to survivor
-JTIC: assets go to estate. Assets must be divided unequally
-TOD: account holder decides who assets are transfered to

RR doesn’t need to confirm instructions each time with both

Question 8

What happens in case a customer dies? What is the customer cannot be located?

Answer 8

Agent must cancel all open order and mark account “deceased”

To sell & transfer assets, RR must receive
-Letters testamentary
-Affidavit of domicile
-Inheritance tax waivers
-Death certificate

If account holder can’t be located by BD, State claims via escheatment process

Question 9

What information is needed before opening a corporate or partnership account?

Answer 9

Who has power to enter order?
Does corp. or GP have charter enabling margin trading?

Question 10

What are the different types of trusts? How are their incomes taxed?

Answer 10

-Revocable trust income taxed as income to grantor.
-Irrevocable: pays taxes as own entity or beneficiaries taxed

-Simple trust: income generated distributed < 1y.
-Complex trust: may retain income ; trust pays taxes on income not distributed.

Testamentary trusts

Grantor taxed if irrevocable trust is his, his spouse’s, or interest in income >5%

Question 11

What is a Discretionary account? What are the requirements?

Answer 11

Registered representative can decide what can be bought or sold and in what quantities.

-Customer signs Limited power of attorney < 3 y
-Time & price discretion only: order needs to be executed < 1d. If not: written instructions
-Direct Participation Programs & issuers with control relationship w/ BD: discretion impossible
-Orders approved by Principal

Question 12

What are the obligation surrounding a fiduciary account? What kind of power of attorney can the third-party have? Guardian?

Answer 12

-Third party must act as “Prudent Man”
-Full PoA: assets and cash can be withdrawn. Limited PoA: just buy & sell decisions.
-Opening account for guardian: court order < 60 d of account opening

Question 13

What is the uniform gifts to minors act? What are the gifts limits?

Answer 13

Regulates accounts for the benefits of minors.
-In account name: custodian, minor, UGMA & State
-Custodian must act as “Prudent Man” (no margin, options, penny, commodities…)
-tax free gift limit: $16k / y
-UTMA: custodian chooses when assets go to child (max 25 y o)

Question 14

What are ABLE accounts? Age condition? Threshold for assistance eligibility?

Answer 14

For care of handicapped.
-Tax free withdrawals for Qualified Expenses (education, care etc.)
-Person must have been disabled by 26 y o
-Eligibility for assistance calc: $100k threshold

Question 15

What are the requirements surrounding accounts for employees of other broker dealers?

Answer 15

-Notification of employer & statement copies sent upon written request
-RR must obtain emlpoyer’s permission. Also for accounts opened < 30 d before employment start. Except: accounts that can’t purchase individual securities

Question 16

What is a Prime Brokerage account and what are the requirements?

Answer 16

-Customers can utilize Several BDs to execute orders, one main BD to hold cash & assets
-Client > $500k equity. If RIA, > $100k

Question 17

What service and form is used to transfer client account from one broker dealer to another?

Answer 17

Automated Client Account Transfer Service ACATS
Transfer Initiation Form TIF

Question 18

What is the process and timeline to transfer client account from one broker dealer to another?

Answer 18

-Carrying firm (the one receiving instructions) needs to validate (or not) < 1 biz day
-Once transfer instructions validated, 3 biz days to complete transfer to receiving firm. Account frozen.
-Nontransferable positions liquidated < 5 biz days.

Question 19

What documents need to be signed to open a margin account?

Answer 19

Credit agreement
-info on interest rates
-terms & conditions

Hypothecation agreement
-pledges customer securities purchased on margin as collateral for loan
-BD can take same securities and re-pledge/re-hypothecate as collateral for bank loan for customer

Loan consent
-BD can lend securities to customers selling short

Securities held in street name

Question 20

What is Day Trading account? What are requirements? What does it mean to “promote DT”?

Answer 20

Buy & sell same security same day
Special disclosures and approval
Firm “promotes DT” only if Principal knows

Question 21

Commingling of customer pledged securities requirements

Answer 21

Only if written auth of both customers
Firm can never comingle with own securities

Question 22

What is a wrap account? What are the requirements and limitations? (license needed, what should be sent to customer?)

Answer 22

Account that charges a set annual fee for both advice and execution costs.
-Schedule H (w/ fees & charges) to customer prior to opening
-BDs offering WAs must also be RIAs
-Asset-based fee accounts not appropriate for clients who trade infrequently

Question 23

What is Reg S-P? What is the difference between a customer and a consumer?

Answer 23

Protection of financial information of customers.

-Initial and annual privacy notice
-Type of info collected and who it’s shared with

Customer vs consumer
-consumer: considering becoming a customer or purchased product from firm. BD must give notice to consumer’s prior to sharing info w/ third party

Question 24

What are the regulations surrounding an RR being named as beneficiary or trustee or executor of client’s estate? Exempt?

Answer 24

Rule 2341
-RR should decline being named as beneficiary or trustee or executor of client’s estate
-If not: written approval from Principal needed
-Decision based on customer’s age, length of relationship, size of bequest vs. estate, customer mental capacity
-Exempt: RRs who do not manage customer accounts, immediate family